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REFILE-EURO GOVT-Bailout doubts push Spanish yields over 6 pct
September 17, 2012 / 5:07 PM / 5 years ago

REFILE-EURO GOVT-Bailout doubts push Spanish yields over 6 pct

* Doubts over Spanish aid request hoist yields

* Spain yields may rise further ahead of Thursday auction

By Emelia Sithole-Matarise and Kirsten Donovan

LONDON, Sept 17 (Reuters) - Spanish 10-year yields rose back above 6 percent on Monday on doubts over when, or if, Spain will seek financial aid needed to trigger European Central Bank bond purchases to subdue its borrowing costs.

Weekend protests in Madrid highlighted how unpopular further austerity measures would be, overshadowing the Spanish government’s pledge of a reform timetable at Friday’s euro zone finance ministers meeting.

Spanish yields were up across most maturities and may rise further before debt auctions on Thursday seen as a gauge of investor confidence in policymakers’ efforts to stem the debt crisis. EURODEBT/O].

“It seems the market is disappointed that things are not going ahead in Spain at a faster pace with a clear timescale that Spain sets itself to qualify for the ECB’s OMT (outright monetary transactions),” Commerzbank strategist David Schnautz said.

“So we’ll probably see Spanish yields pushing more to the upside. The 6 percent level for 10-years gives a headsup that despite the ECB signal on bond purchases targeting the short end, the country remains in deep trouble.”

Spanish 10-year yields rose 18 basis points on the day to 6.04 percent, bouncing off a five-month low of 5.58 percent low hit early last week after the ECB detailed its bond-buying plan. The central bank measure is, however, conditional on struggling issuers asking for aid before it can step in.

Two-year Spanish bond yields were 12 basis points higher at 3.36 percent, with the Italian equivalent up 8 basis points at 2.6 percent.

The uncertainty over when Madrid was likely to trigger ECB intervention was also prompting some traders to push for cheaper prices before Spain’s auction on Thursday of 3.5-4.5 billion euro of bonds, including a new three-year bond and reopening of the benchmark 10-year bond, maturing Jan. 31, 2022.

The country has not attempted to raise more than 3.5 bln euros from a bond sale since early March, when the market was flush with cheap credit from the ECB’s second round of cheap one-year funds.

It also plans to raise 3 billion euros through a private placement with Spanish banks on Friday as part of an emergency liquidity fund aimed at lowering borrowing costs for cash-strapped regions. The country also faces a potential ratings downgrade from Moody’s at the end of the month.

“Any bad news out of Spain will push yields higher. Once 10-year yields get to the 7-8 percent level you could see the flattening of the curve,” said Credit Suisse strategist Michelle Bradley.

“Spain needs to come back to the market twice a month and with yields at these kinds of levels it raises the question of sustainability. But it also makes it hard to call in terms of timing.”


The doubts over Spain helped safe-haven German Bunds recover some ground after a sharp sell-off last week after the U.S. Federal Reserve said it would pump $40 billion into the U.S. economy each month until it saw a sustained upturn in the jobs market.

German Bund futures rose 36 ticks to settle at 139.00, with 10-year yields down 2.7 basis points at 1.65 percent.

Ten-year Bund yields tested June’s 1.69 percent high - the top of the range of the last five months - before retreating.

“There is potential for more upside yield moves but we do not think levels lurch much higher and we ultimately see a move back to the range,” RBS rate strategists said in a note.

They added that for money to flow out of Bunds and back to the euro zone periphery would require “evidence the ECB has cracked the puzzle to bring lasting low-yield equilibrium to the periphery”, something RBS does not see as likely.

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